The 10 Commandments of Governance

8/3/2019 The 10 Commandments of Governance

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The 10 Commandments of Good Governance in Banks

By Hany Abou-El-Fotouh

Due to the banking crisis of 2008, the question of how banks can protect themselves

against future failures has attracted the attention of regulators, banking experts and

business media. An important area is the need for better transparency, mainly regardingremuneration in the banking sector, and how boards of banks should improve their

corporate governance practices to reduce the chances of a repeat of the credit crunch.

The recent publication of Central Bank of Egypt draft Code of Corporate Governance for

banks marks a significant step in this process. Banks together with their respective boards

should pay close attention to the corporate governance guidelines.

There are several tips and recommendations for good governance available for the board

of banks. Yet, I consider the following `10 commandments` are central in establishing a

sound governance regime:

1-Set the right tone at the top.

The main concerns for the board should include guiding, approving and overseeing the

banks strategic objectives, corporate values and policies. This could be achieved by

developing a code of conduct for the bank employees, management, and board members.

Likewise, the board should clearly define areas of responsibility, authority levels and

reporting lines within the bank.

2-Ensure adequate qualifications of board members

The board should have adequate knowledge and experience relevant to each of the

material financial activities the bank intends to pursue to enable effective governance and

oversight of the bank.

To ensure that non-executive directors have the knowledge and understanding of the

business, the board should provide thematic business awareness sessions on a regular basis

and each director should be provided with a tailored induction, training and development

to be reviewed annually with the chairman. Similarly, suitable arrangements should be

made for executive board members in business areas other than those for which they have

direct responsibility.

Non-executive directors are encouraged to spend more time in the business to ensure that

they can participate effectively to strategy and other board decisions.

3-Appoint independent non-executive directors

To foster an independent element within the board, banks must consider that independent

directors should constitute a significant membership of the board, and that the board

should have at least three independent, non-executives directors. Larger banks may have a

higher proportion of non-executive directors.

Non-executives directors should be able to devote sufficient time to the role in order toassess risk and ask tough questions about strategy.

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In UK, there are recommendations for banks to appoint a senior independent director

(SID) whose role is to provide a sounding board for the chairman and serve as a trusted

intermediary for the non-executive directors, when necessary.

4-Establish board-risk governance

Banks should establish a board risk committee to work in tandem with existing auditcommittee. The risk committee would concentrate on risk strategy and management, free

from any conflict with demands placed on audit committees. The risk committee would

report regularly (as part of the annual report) on risk strategy and risk management. The

risk committee has authority to seek external advice to test its risk management

assumptions, particularly in the context of risk related to significant banking transactions.

Given the importance of an independent risk management function, banks should appoint

a chief risk officer (CRO) with sufficient authority, stature, independence, resources and

access to the board. This executive should be reporting to both the risk committee and

internally to the CEO. Removal of the CRO should be subject to board discussion and

public disclosure.

5-Expand scope of the remuneration committee

The scope of the remuneration committee should be expanded to cover all aspects of

remuneration policy on a bank-wide basis with particular focus on the risk dimension. The

remuneration committee is responsible to review the compensation philosophy and major

compensation programs.

In order to reduce the perceived excessive risk-taking within banks, this committee will

also be expected to approve the links between performance targets and pay or bonus

schemes. At least half of bonuses should be paid in the form of a long-term incentive

scheme.

6-Develop Information Technology (IT) governance

IT governance provides the structure that links IT processes, resources and information to

the bank's strategies and objectives, enhances effective board decision-making and creates

greater transparency and accountability. IT governance ensures that related risks are

properly identified and managed. The board needs to approve IT expenditures and provide

adequate oversight over all aspects of IT governance, including procurement, outsourcing,

the efficiency of systems and procedures, IT security, customer data protection andadequacy of anti-fraud and anti-money laundering systems.

7-Improve efficiency through board evaluation

The board and board committees should be subject to a formal and rigorous performance

evaluation with external facilitation of the process every three years. The evaluation

statement should either be included as a dedicated section of the chairmans statement or

as a separate section of the annual report, signed by the chairman. Where an external

facilitator is used, this should be indicated in the statement, together with their name and

other meaningful details for the shareholders.

8-Manage conflicts of interest effectively

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Banks should establish information barriers (Chinese walls) between the different

departments so that decisions by staff in one department are made in ignorance of

confidential information available to staff in other departments which might affect their

decision. Conflicts by board members or senior executives should be disclosed to the

banks compliance officer. A good corporate governance practice is to put in place and

disclose a conflicts of interest policy.

9-Monitor the governance of banks' clients

It is important for banks that their clients apply the principles of good governance. Banks

may consider that it is in their own best interest to check the governance framework and

practices of their corporate borrowers. Even in circumstances where a bank cannot

directly influence the governance practices of their borrowers, it can have an important

influence by "leading by example".

10-Track potential governance failures

Banks should have in place a policy setting out adequate procedures for employees withconcerns about the integrity of the bank's operations or its staff (so called whistle blowing

policy). Employees should be able to communicate their concerns with corporate

protection from retaliation from the management. The procedure should facilitate the flow

of confidential and direct or indirect communication to the board (or Audit Committee)

outside the internal chain of command. The establishment of proper communication

channels would allow bank staff to discuss their concerns in confidence without fear of

retaliatory action.

Conclusion

Good corporate governance is crucial for todays complex and dynamic banking

environment to ensure long-term sustainability and trust of stakeholders including

regulators, investors, clients and employees. Therefore, it should be cultivated and

practiced regularly within banks at board and executive management levels. Remember;

Corporate governance is like a muscle, should be exercised or it will atrophy!

About The Author:

Hany Abou-El-Fotouh is Chief of Staff & Group Board Secretary, CI Capital Holding -

the investment banking arm of Commercial International Bank which is the largest private

bank in Egypt . He provides advice and direction to the Board and management withrespect to corporate governance practices and formulates corporate policies.

Hany is a leading expert on money laundering and terrorist financing controls in the

MENA region. Founder of the Middle East Compliance Officers' Forum (MECOF), he has

been honored for his work in promoting compliance culture and awareness in the MENA

region

Hany writes articles to different newspapers and journals on a variety of subjects. He is a

public speaker and professional trainer. Previously, he worked in various senior positions

in leading banks in Egypt and GCC countries like HSBC, Oman International Bank,

Banque Saudi Fransi among others

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Hany is a certified member of the Association of Certified Anti-Money Laundering

Specialists (ACAMS) and Certified Director by Egyptian Institute of Directors

http://www.linkedin.com/in/ hanyfotouh

[email protected]

Tags: governance, corporate governance, banking, hany abou-el-fotouh, banks, regulators,stakeholders, risks, audit, board, remuneration

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http://www.linkedin.com/in/hanyfotouhmailto:[email protected]://www.linkedin.com/in/hanyfotouhmailto:[email protected]

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The 10 Commandments of Governance